17 February 1993 Income Tax Severed Letter 930202A F - Whether Debt Owing to Taxpayer

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

XXXXXXXXXX

Business and General Division

Attention:  XXXXXXXXXX

Bad Debt

This is in reply to your memorandum dated January 20, 1993 wherein you request our views concerning a claim for a bad debt by a taxpayer.

You describe a situation where the taxpayer has advanced funds to purchase a shopping mall with the debtor and subsequently filed a law suit to recover these advances. The debtor's defence is that the purchase of the mall is on hold pending a written commitment to the purchase from the taxpayer. The law suit has not been settled and in the meantime the taxpayer is claiming a bad debt under paragraph 50(1)(a).

Specifically you request our views regarding: (a) the word "Generally" as used in the context of the third sentence in paragraph 10 of IT- 159R3 and (b) the amount of audit evidence to establish a transaction having taken place.

OUR VIEWS

In order for a capital debt to be a bad debt as described in paragraph 50(1)(a) of the Act there must be "a debt owing to the taxpayer". The onus is on the taxpayer to establish that there is a debt owing to him and the taxpayer in your case does not appear to have done so. The taxpayer advanced funds to purchase a shopping mall and has sued to recover those advances. The defence filed by the debtor is that the purchase of the mall is on hold pending the commitment by the taxpayer to the purchase in writing. The law suit has not been settled. The taxpayer and the debtor may in the future agree or the courts may determine that there is a precise amount owing to the taxpayer and depending on the particular circumstances that amount may not necessarily be the amount advanced.

In our view the advances by the taxpayer can not be considered a debt owing to him. The courts in the cases of Beament v. M.N.R. 69 DTC 5016 and Guay v. The Queen 75 DTC 5090 defined debt to mean "the sum payable in respect of liquidated money demand, recoverable by action". The taxpayer on the basis of the information described in your memorandum has not in our view established that there is a debt owing to him. In our view unless the two parties agree or the courts determine that a precise amount is owing to the taxpayer there can not be a debt owing to him for purposes of paragraph 50(1)(a) of the Act.

The word generally as used in the context of the third sentence of paragraph 10 of IT-159R3 means this is a general rule which will apply in most cases but there will be cases where this general rule will not apply. This recognizes that there may be situations where a creditor can establish that a debt owing to him has become bad before he has exhausted all legal means to collect it (eg., the debtor has no assets and it would be futile for the creditor to pursue all legal means of collecting the debt in that in the end he would not collect anything anyway). The third sentence of paragraph 10 of IT-159R3 must be read within the context of the whole paragraph which states:

"The time at which a debt becomes a bad debt is a question of fact and any decision made must be dependent upon the circumstances in each case. A determination by a creditor that a debt has become bad in a particular taxation year must be supported by all relevant and material facts. XXXXXXXX. A debt is considered bad for purposes of section 50 only when the whole amount is uncollectible or when a portion of it has been settled and the remainder is uncollectible. Otherwise, where a portion of a debt can be considered uncollectible, this portion is not considered to be bad for purposes of section 50 even though accounting practice may require a write-down to realizable value. Where an amount owing by one debtor consists of more than one debt, each debt is considered separately in determining the extent to which the above comments apply. For example, one debt may be secured and collectible whereas another debt may be unsecured and uncollectible and, therefore, qualify as a bad debt."

The fact that there are other judgements against the debtor does not necessarily mean the whole amount of the debt owing to the taxpayer (presuming he can establish there is a debt owing to him) is uncollectible. The taxpayer may be able to realize a portion of the amount owing to him as long as the debtor owns assets in which case the remainder which is not settled may be considered uncollectible.

The admission by the debtor of receiving three cheques for investment purposes does not necessarily in and by itself establish that there is a debt owing to the taxpayer let alone establish that it is an uncollectible debt especially if the debtor contends the deal is still on pending the taxpayer's commitment to the purchase in writing.

As regards your second question, the issue of what constitutes sufficient evidence of a transaction taking place will depend on the facts of the case. The best evidence available is to be preferred. Accordingly, you are quite right to request supporting documents and where these are not forth-coming with respect to an alleged multi- million dollar transaction, to doubt whether the alleged transaction took place or took place exactly as described. On the other hand, documentation is not always available and the courts will accept the word of a credible witness. Officials of the District Office are generally in a better position to weigh all the circumstances of a case and therefore decisions of this nature are better made at the District Office. It is important that the factual assumptions on which any assessment is based be clearly set out in the audit report and working papers, as the onus will be on the taxpayer to disprove these assumptions.

We trust our comments will be of assistance.

E. Wheeler for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

c.c.      W. Adams      Audit Technical Services