568864 B.C. [Woodtone] – Tax Court of Canada decision confirms that a loan loss that is converted to an accrued terminal loss under s. 79.1(6) potentially can be deducted when realized

The taxpayer, a board producer, lent $3.5 million to a supplier secured by a security interest on patents held by the supplier's shareholder.  On bankruptcy of the supplier and its shareholder, the trustee in bankruptcy assigned the beneficial (but not registered) ownership of the patents to the taxpayer, so that the taxpayer was deemed by s. 79.1(6) to have acquired them at a cost of $3.9 million (including legals) notwithstanding that their fair market value could have been much less.

Rip J found that the taxpayer realized a $3.9 million terminal loss two years later when it sold the beneficial interest in the patents to a related corporation for $1.  Unsuccessful attempts to find a joint venture party to exploit the patents were sufficient corroboration that the patents had been acquired for an income-producing purpose.  The effect was that the taxpayer deducted its loan loss on income account.

Neal Armstrong.  Summaries of 568864 B.C. Ltd. v. The Queen, 2014 TCC 373 under s. 79.1(2) and Reg. 1102(1)(c).