The Assistant Chairman:
1 This is the appeal of Greensteel Industries Ltd from an income tax reassessment in respect of the appellant's 1970 taxation year.
2 By notice of reassessment dated September 12, 1972, the Minister of National Revenue disallowed in the appellant's 1970 taxation year an amount of $100 being that portion of what the appellant claims to be a deductible business loss of $52,107.30 and which the Minister assumes to be a capital loss.
3 Counsel for the respondent contends that the amount of $52,107.30 is a capital outlay within the meaning of paragraph 12(1)(b) of the Income Tax Act and that it cannot come within the provisions of paragraph 11(1)(f) of that Act. Alternatively the respondent contends that even if the amount of $52,107.30 were included in the provisions of paragraph 11(1)(f) of the Act it should have been considered a bad debt in 1963 and not in the appellant's 1965 taxation year.
4 Counsel for the appellant, on the other hand, contends that the amount of $52,107.30 was a business loss incurred by the appellant in 1963 and was properly deducted by the appellant in 1965 pursuant to section 11(1)(f) of the Act.
5 In deciding the issue in this appeal the Board must determine first, whether the sum of $52,107.30 is a capital loss or a business loss for the appellant and, secondly, if it is a business loss, whether, within the meaning of section 11(1)(f) of the Act, the debt became bad in 1963 or in 1965.
6 From evidence given by Mr W S Martin, Barrister, who since 1961 is president of Greensteel Industries, and at one time was its principal shareholder, it appears that a plan was set up in 1961 to form a syndicate composed of Mr Martin, Mr George C Davis, Mr George Newman, Mrs Roberta Nicholson and Mrs Ethel Thelma Martin to purchase all the issued shares of Greensteel Industries Ltd, Greensteel Fabricators Ltd, Logan Industries Ltd and Bel-Air Steel Products Ltd, from Greensteel Industries of Canada Ltd. This was in fact realized (Exhibit A-14). Greensteel Industries Ltd, with which we are particularly concerned in this appeal, was engaged in the fabrication of heavy steel plates but it also engaged in a light metal division for the production of light metal products such as water heaters. Greensteel Fabricators, which is also concerned in this appeal, was principally engaged in metal ornamental products and obtained its basic materials from Greensteel Industries.
7 Although Greensteel Industries had its own offices and its own plants and was operating at arm's length in relation to Greensteel Fabricators, it had, because of the original plan of the syndicate and the utilization of the same basic products, closer business relationship with Greensteel Fabricators than is normally the case.
8 In 1962 Mr Newman, who was manager of Greensteel Fabricators as well as a shareholder, owing to a disagreement, instituted action against William S Martin and George C Davis for payment of $10,000. The plaintiff's case was dismissed in Court of the Queen's Bench, on April 8, 1971.
9 It is my understanding that Mr Newman, in 1962 or 1963, was fired as manager of Greensteel Fabricators but retained his shares in the company. In that period of time Greensteel Fabricators was treated by Greensteel Industries as any other company but it was Mr Martin's intention, as president of Greensteel Industries, to keep Greensteel Fabricators alive and there is evidence that Mr Martin wanted to buy Mr Newman's shares in Greensteel Fabricators but the latter never agreed to the sale of his shares.
10 It is in this very general background that the transactions between Greensteel Industries and Greensteel Fabricators took place and which gave rise to the issue before us. It is also important to note that in 1963 the auditors of Greensteel Industries were a firm of chartered accountants by the name of Chalmers. In 1964 and 1965 the firm of W D Love & Company did the appellant company's auditing. In 1966 and subsequently the firm of Clarkson, Gordon & Co became the auditors of the appellant company and Mr John Green of that firm was an important witness at the hearing of the appeal.
11 From Mr Green's testimony and from supporting documents the amount of $52,107.30 had theretofore been carried in the appellant's books as an asset but was considered by the new auditors to be uncollectable. The 1965 income tax return of the company was amended by the firm of Clarkson, Gordon & Co and the amount was written off as a bad debt in 1965 and claimed as an expense.
12 It is alleged by the appellant that the amount of $52,107.30 in accounts receivable arose as a result of sales of steel products made by the appellant to Greensteel Fabricators in 1963. Whether these sales were made at cost or whether a profit was realized on them, in my opinion, is not material to the issue of this appeal. What is important, it seems to me, is whether we are dealing with a sale at cost or whether a profit was realized on them, in my opinion, is not material to the issue of this appeal. What is important, it seems to me, is whether we are dealing with a sale at cost or otherwise or whether we are dealing with a loan. I do not believe that a sale even at cost can be legally considered as a loan.
13 The amount of $52,107.30 was not disputed by counsel for the respondent but he claimed that the amount was on capital account and could not be deductible as a business loss.
14 There is no doubt in my mind that Greensteel Fabricators obtained its basic metal from Greensteel Industries for the production of its metal ornaments and that a bona fide trading account had over the years arisen between the two companies (Exhibits A-7 to A-12). The trading account persisted in 1963 as shown in Exhibits A-3 and A-4. However there was also an amount of $14,381.20 dating back to December 31, 1962, owing to the appellant company for loans and advances to Greensteel Fabricators and which appears on the ledger card (Exhibit A-5).
15 This amount of $14,381.20 is not being claimed by the appellant and apparently not included in the trading account of $52,107.30 as shown in the reconciliation of balance sheets of both the appellant company and Greensteel Fabricators (Exhibit A-6). The appellant claims that the amount of $14,381.20 in advances made to Greensteel Fabricators was included in the receipt of $32,224.55 by the appellant company in its assumption of assets and liabilities of Greensteel Fabricators. Counsel for the respondent did not dispute this point.
16 The appellant company's financial statement as at December 31, 1963 (Exhibit A-1) shows an amount receivable from Greensteel Fabricators of $54,879.22. The same amount is shown in Greensteel Fabricators' financial statement of December 31, 1963, as payable to the appellant company (Exhibit A-2). The amount of $54,879.22 in receivables of the appellant company was subsequently adjusted by the payment of $2,771.92 to the appellant company by Greensteel Fabricators, which left a net amount of $52,107.30 in 1964, and which was claimed and written off as a bad debt in 1965.
17 In the appellant company's original 1965 income tax return prior to its amendment by the firm of Clarkson, Gordon & Co., counsel for the respondent pointed out a note to the effect that there were no assets to offset the payment of this loan. It is on record that there were amounts of advances and loans made by the appellant company to Greensteel Fabricators as we have seen. For reasons best known to the auditors, these loans and advances were not separated from the appellant company's trading accounts with Greensteel Fabricators by the previous auditors but were deducted from the appellant company's trading account by the firm of Clarkson, Gordon & Co.
18 On the basis of the facts of this appeal, I have come to the conclusion that as at December 31, 1963, the appellant company had a favorable net trading balance of $52,107.30 with Greensteel Fabricators.
19 Having come to the conclusion that the amount of $52,107.30 in issue was a trading account, the Board must now determine whether that account became a bad debt in 1963 as claimed by the respondent, or in 1965, at which time it was written off as a bad debt by the appellant company.
20 In order to support his contention that the appellant company's debt became bad in 1963, counsel for the respondent produced as an expert witness, Mr David Ross Baird, an appeals' officer of the Department of National Revenue and a chartered accountant since 1956. In answer to a theoretical question, the witness stated that generally he would consider that a debt became bad when all the assets of the debtor company had been disposed of. In answer to questions during cross-examination the witness did not say and would not say whether in this appeal the debt became bad in 1963 or in 1965 but stayed solidly on the general principle that he had enunciated.
21 In this appeal there are two facts which I believe should be considered in deciding exactly when the appellant company's debt became bad. First, there is only a relatively short period of time between 1963 and 1965. As I understand it, even though, as claimed by counsel for the respondent, all the hard assets of Greensteel Fabricators were sold at the end of 1963 and the company was no longer doing any active business, an amount of $2,771.92 was paid by Greensteel Fabricators to the appellant company presumably in 1964; secondly, it is on record that an action was instituted against Mr Martin, president of the appellant company, by Mr Newman, president of Greensteel Fabricators, at the end of 1962, and that it was the appellant company's intention, through Mr Martin, to acquire all of Mr Newman's shares in Greensteel Fabricators and to operate it, which, had the purchase been realized, would have changed Greensteel Fabricators' financial situation considerably.
22 It would seem to me that, although as a general rule a debt becomes bad when all the assets of the debtor company have been disposed of, in this instance, the debtor apparently still had some assets in 1964 but more important still, there was the hope of the appellant company's president of buying out Mr Newman's shares and reviving Greensteel Fabricators as an active company and eventually collecting its receivables. In my view there was a possibility of recovering its receivables in 1964 and though the debt could be looked upon as a doubtful debt in 1964, the decision as to whether the principal shareholder wishes to consider it bad or not rested entirely with him and his business judgment. I do not believe that in the circumstances of this appeal the Minister can or should substitute his judgment for that of the taxpayer through its president.
23 In conclusion therefore, I hold that the amount of $52,107.30 was receivable in a regular trading account of the appellant company and that the company acted within its rights in considering that amount as a bad debt in 1965 and in deducting it from its income in that year.
24 For these reasons the appeal is allowed.
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