Monaghan v. R., [1996] 2 CTC 2169, 95 DTC 920 (Informal Procedure)

Teskey: — The Appellant appealed his assessment of income tax for the years 1987, 1988 and 1989.

ISSUE: The issue before me is whether the Appellant has a valid Allowable Business Investment Loss, (ABIL), in 1986 or a capital loss in 1987. It was conceded by the Appellant that if he does not have an ABIL in 1986, that the loss was a capital loss in 1987.

FACTS: The loss arises from a shareholder loan made by the Appellant to Monaghan Delph Miller Limited, (MDM), a private company that the Appellant had a 60 per cent interest therein. MDM owned a 75 per cent interest in ESRI Canada Limited, (ESRI), and the other 25 per cent was owned by ESRI Inc., an American corporation which was owned by Jack Dangermond. MDM owned 100 per cent of Northway Map Technology Limited, (Northway). The loan at the end of December, 1986 was $331,926.00.

Paragraph 50 (l)(a) reads, shortened down as follows:

… a debt owing to a taxpayer at the end of a taxation year … is established by the taxpayer to have become a bad debt in the year ...

The evidence of Barry Allan Howard, (Howard), Alan Petrie, (Petrie), and Stephen Jarvis, (Jarvis), was clear, concise and unambiguous.

Howard, a very knowledgable, dynamic, very successful businessman, put together a successful business plan for MDM and/or Northway, and because of him enough capital was injected into Northway and sufficient controls were put in place that the Canadian Imperial Bank of Commerce, (CIBC), stopped liquidating MDM.

Petrie was the CIBC manager that loaned MDM money. It was he who insisted that Coopers & Lybrand do a complete financial review of MDM and its associated companies in the fall of 1986 which culminated in a $39,000.00 report to the CIBC dated December 1st, 1986.

Jarvis, who holds a Masters in Business Administration from Stamford University, was hired at the end of June, 1987 as Vice-president and Controller of Northway. He immediately did a detailed review of the finances.

There is no point in reproducing their evidence. Suffice it to say that the combination of their testimony and the various exhibits proves beyond any reasonable doubt that as of December 31st, 1986 the debt had become a bad debt.

MDM and/or Northway were out of money and were surviving on continuous borrowing from the CIBC. The note or shareholder loan was worthless. The fact that CIBC allowed interest to be paid on the loan up to mid- July of 1987 when the note was cancelled for $1.00 is not relevant.

Also the fact that Northway, with the injection of $500,000.00 in mid- 1987, and having Howard as Chief Executive Officer and Jarvis as Controller saved the company and turned it around into a successful profitmaking company is immaterial. The simple question is was the debt a bad debt in December of 1986? The answer is yes.

The Respondent has put forward to me in argument that that is not sufficient for the Appellant to win; that the Appellant on the jurisprudence before me is that he has to make the decision in the year, or very shortly thereafter. She quotes a decision of the Income Tax Appeal Board of Hogan v. Minister of National Revenue, 56 DTC 183, 15 TAX ABCI, where the member Fisher indicated that a taxpayer could do that up to 18 months. That decision appears to have been followed by other decisions that counsel for the Respondent has put to the Court. It does not appear to be followed or discussed in other decisions of this Court. I read the Act and I do not see where that determination has to be made within the year. I believe the taxpayer has to show that it’s outstanding at the end of the year and during that year it’s bad. That’s how I read the section. I accept the argument, although very short and very brief, that the Appellant has put forward to me on that point.

I feel I am compelled to say that I was not impressed by Karen Williams, a Chartered Accountant who prepared the Appellant’s 1988 tax return and negotiated with the Department of National Revenue. Because of her ineptitude and less-than-diligent work, she made representations to National Revenue on behalf of her client that were simply not true. She was careless at best with the facts. Her incompetence, however, should not be held against the Appellant. If it hadn’t been for that evidence put forward by Howard, Petrie and Jarvis, the Appellant would not have won before this Judge. The Appellant would have been stuck with his accountant’s representations, but in this peculiar case with the outside evidence being as strong as it is, I feel that the Appellant must not be hindered in what is allowable to him because of the representations and the work done by his Chartered Accountant. The slough-off by her was totally unacceptable. Her evidence was simply this; “I was preparing the 1988 return, it had to be filed and I all of a sudden realized, oh, there’s a loss there so I just stuck it in, knowing that Revenue Canada would write to me and want the facts.” As a result, in essence, the Appellant filed a false return.

The Appellant, I find, is a truthful, honest businessman. Maybe he was a little incompetent in running MDM and Northway, but I don’t think he was dishonest. He signed what he thought a competent tax accountant was preparing was proper. Then she went ahead, and again without any real in-depth knowledge of the Act and/or the true facts, she tries to move the AB IL from 1988 into 1987 and, fortunately for the Appellant, he got himself in the hands of capable, competent lawyers. That’s enough said about that matter.

Are there any submissions you want to make on costs?

MS SHEPPARD: No, Your Honour.

HIS HONOUR: I hesitate giving the Appellant costs because of the actions of Ms Williams, but I don’t think he should be penalized because of her total ineptitude.

Therefore I am going to allow the appeals with costs. The assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant had an Allowable Business Investment Loss in the total amount of $331,926 in 1986.

Appeals allowed.