Docket: 2004-659(GST)I
BETWEEN:
PATRICK McCOOL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal
heard on January 28, 2005, at Toronto,
Ontario
Before: The Honourable
Justice Michael J. Bonner
Appearances:
|
For the Appellant:
|
The
Appellant himself
|
|
Counsel for the Respondent:
|
Craig Maw
|
____________________________________________________________________
JUDGMENT
The appeal is dismissed.
Signed at Toronto, Ontario,
this 20th day of May 2005.
Michael J. Bonner
Citation: 2005TCC357
Date: 20050520
Docket: 2004-659(GST)I
BETWEEN:
PATRICK McCOOL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bonner, J.
[1] This is an appeal from an assessment under Part IX of
the Excise Tax Act (the “Act”) for the reporting period ending
December 31, 1997. By the assessment in issue the Minister of National Revenue
(the “Minister”) disallowed part of a deduction claimed under subsection 231(1)
of the Act in respect of the Appellant’s 1995 receivables from the
practice of law.
[2] Section 231
allows a deduction in the computation of net tax payable in respect of bad
debts written off by the taxpayer. The deductible amount is, in effect, the tax
component of the debt that has been found to be bad. Subsections 231(1)
and (3) read:
(1) Bad
debts - Where a person has made a taxable supply (other than a zero-rated
supply) for consideration to a recipient with whom the person was dealing at
arm’s length, to the extent that it is established that the consideration and
tax payable in respect of the supply have become in whole or in part a bad
debt, the person may, in determining the net tax for the person’s reporting
period in which the bad debt is written off in the person’s books of account or
for a subsequent reporting period, deduct, the amount determined by the formula
B
A x C
where
A is
the tax payable in respect of the supply,
B is the total of the consideration, tax and any amount that
can reasonably be attributed to a tax imposed under an Act of the legislature
of a province that is a prescribed tax for the purposes of section 154
(referred to in this section as “applicable provincial tax”) remaining unpaid
in respect of the supply that was written off as a bad debt, and
C is the total of the consideration, tax and applicable
provincial tax payable in respect of the supply,
provided the
person reports the tax collectible in respect of the supply in the person’s
return under this Division for the reporting period in which the tax became
collectible and remits all net tax, if any, remittable as reported in that
return.
(3) Recovery
of bad debt – Where a person recovers all or part of a bad debt in respect of
which the person has made a deduction under subsection (1) or (2), the person
shall, in determining the net tax for the reporting period of the person in
which the bad debt or part thereof is recovered, add the amount determined by
the formula
B
A x C
where
A is
the amount of the bad debt recovered by the person;
B is the tax payable in respect of the supply to which the
bad debt relates; and
C is the total of the consideration, tax and applicable
provincial tax payable in respect of the supply.
[3] Subsection (1)
thus imposes two conditions which must be met by the taxpayer who claims the
deduction. First, it must be established that the consideration and tax payable
in respect of the supply have become a bad debt either in whole or in part.
Second, the deduction must have been made in the taxpayer’s books of account
for the reporting period or a later period. It is the second condition which is
placed in issue here.
[4] At the hearing
of the appeal evidence was given by the Appellant and by Maureen Pappin, a tax
consultant who assisted the Appellant. The evidence was somewhat confused and
unsatisfactory, not because either witness was untruthful, but rather because
Ms. Pappin mixed advocacy with testimony. Moreover, much of what she had to say
was hearsay based on information received from the Appellant. Happily, the
Appellant was second to testify and thus was available for cross‑examination
on information furnished by him to Ms. Pappin.
[5] The Appellant is
a lawyer practicing in the field of criminal law. The bulk of the fees which he
earns are paid by the Ontario Legal Aid Plan. According to the Appellant in
1995 the legal aid system was undergoing changes and lawyers were encouraged to
submit their accounts as promptly as possible. The accounts were subject to
review and reduction by officials of the Plan. Protracted delays in payment
were experienced. Thus it happened that in the year 2002 the Appellant reviewed
his unpaid receivables for 1995 and found that 142 out of a total of 175 were
owing by the Legal Aid Plan.
[6] In my view a bad
debt cannot be considered to have been written off in a person’s books of
account unless and until a notation is made in those books that the particular
debt has been written off. An unrecorded decision will not suffice. A journal
entry ought to be made to clear out each worthless receivable. Otherwise, subsection 231(3)
would be impossible to enforce.
[7] The Appellant’s
books of account were kept on a “One–Write” system. They consisted of a cash
disbursements journal, a billings and receipts journal, a trust account journal
and a client card. No entry was made before the end of the 1997 reporting
period in or on any of those financial records indicating that the relevant
receivables had been written off as uncollectible. The Appellant did, before
the end of that year, review the receivables. He did prepare a summary or
memorandum setting out the total amount of the debt which he viewed as
uncollectible. He failed however to list in that summary the individual
accounts which made up the total. He turned the summary over to Ms. Pappin.
He did not make any notation in the books of account identifying the accounts
which he believed to be uncollectible. In my view the Appellant failed to meet the
requirements of subsection 231(1).
[8] The appeal will
be dismissed.
Signed at Toronto, Ontario, this 20th day of May 2005.
Michael J. Bonner
CITATION: 2005TCC357
COURT FILE NO.: 2004-659(GST)I
STYLE OF CAUSE: Patrick McCool and Her Majesty the Queen
PLACE OF HEARING: Toronto,
Ontario
DATE OF HEARING: January 28, 2005
REASONS FOR JUDGEMENT BY: The
Honourable Justice Michael J. Bonner
DATE OF JUDGMENT: May 20, 2005
APPEARANCES:
|
For the
Appellant:
|
The Appellant himself
|
|
Counsel for the
Respondent:
|
Craig Maw
|
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the
Respondent: John H. Sims, Q.C.
Deputy
Attorney General of Canada
Ottawa,
Ontario
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