Reginald D. Richardson v. Minister of National Revenue, [1993] 1 CTC 2458, 93 DTC 258

Brulé, T.C.C.J.:—This is an appeal involving the taxation years of 1986 and 1987 wherein the appellant was disallowed certain deductions from his income. He had claimed some debts as non-capital losses or in the alternative noncapital losses could be claimed on the deemed disposition of debts as bad debts.

Issues

At the outset the Minister of National Revenue ("respondent") conceded that the appellant became indebted to his company in total at least equal to the bad debts claimed by the appellant. It was conceded that if the debt had gone bad in the taxation years before the Court it would be an allowable business investment loss.

Three issues remained to be decided:

1. Were the activities of the appellant's company (Richcrest Holding and Development Ltd. ("Richcrest")) such as to be considered in the nature of trade, or a capital investment?

2. Did any debts claimed by the appellant become bad debts in 1986 and 1987?

3. Were the debts acquired by the appellant for the purpose of earning income (other than the $25,678.04 conceded by the respondent)?

Facts

The important facts in this case are set out below and are largely taken from the notice of appeal.

1. Reginald D. Richardson (the"appellant") is a shareholder and director of Richcrest Holding and Development Ltd. (the"company").

2. The company was incorporated in 1977 to carry out scientific research and experimental development (” R & D") relating to new process systems in the energy field. In particular, the company has developed a system for synthetic oil production from heavy oil and tar sands and is developing a system for co-processing heavy oil and coal. The appellant has devoted a significant amount of time and effort to the R & D activities of the company as a shareholder, director and sole employee but without drawing any remuneration therefor.

3. Financing of the R & D activities of the company were derived in part from loans made by the taxpayer to the company during the period from 1981 to 1987. The company repaid some of these loans.

4. The minutes of a meeting of the board of directors of the company on June 21, 1986 refer to the loans made by the appellant and the fact that the related notes were uncollectible by him.

5. The appellant determined that the notes owing to him were bad debts and, accordingly, he claimed a non-capital loss of $34,249 in his income tax return for the 1986 taxation year.

6. This process was repeated with respect to the 1987 taxation year involving a Claim of $36,651.

7. The respondent disallowed these claims for bad debts and this appeal resulted therefrom.

Appellant's Position

In addition to a well worded brief submitted by the appellant certain arguments in support of the appeal taken from the notice of appeal were advanced and are reproduced herein:

The appellant submits that he should be entitled to claim non-capital losses of $34,249 for the 1986 taxation year and $36,651 for the 1987 taxation [year] as a result of having incurred business or property expenses within the meaning of paragraph 18(1)(a) of the Act in excess of business or property income. The expenses were incurred by the appellant by way of his loans made to the company in exchange for notes which were not repaid by the company. The expenses were incurred to earn income from a business or property because it was the intention of the appellant to make a profit by patenting his R & D processes and selling them through the company, rather than to derive income from any direct use of those processes by him or the company. Accordingly, the loans or the losses on the notes should be treated as deductible expenses under paragraph 18(1)(a).

In the alternative, the appellant submits that he should be entitled to claim a non-capital loss in respect of the bad debts in the 1987 taxation year and a noncapital loss carried back to the 1986 taxation year.

In the alternative, the appellant submits that he should be entitled to claim business investment losses within the meaning of paragraph 39(1)(c) of the Act for the 1986 and 1987 taxation years in respect of the notes owing to him on his loans made to the company. The notes were owing to the appellant and were determined by him to have become bad debts. Therefore, the bad debts were deemed to have been disposed of by the appellant for capital losses pursuant to subsection 50(1). Further, the capital losses arose on a disposition by the appellant of the notes or debts owing to the appellant by a small business corporation and, accordingly, the losses on the notes should be treated as business investment losses under paragraph 39(1) (c).

In the alternative, the appellant submits that he should be entitled to claim a business investment loss in respect of the bad debts in the 1987 taxation year and a business investment loss carried back to the 1986 taxation year.

In support of the above position and in written argument reference was made to several cases. I do not intend to deal with these as such is not necessary.

Respondent's position

Counsel for the respondent dwelled on three points in argument:

1. The loans made by the appellant to Richcrest did not become bad debts during 1986 and 1987;

2. The loans were not business related except to the amount of $25,678.04;

3. The appellant's activities related to Richcrest were an investment by the appellant and not an adventure in the nature of trade.

Several cases were referred to in dealing with the various alternative arguments presented by the appellant but I do not feel that such would be helpful in reaching a decision.

Analysis

This appeal comes down to one point. Did the debts become bad debts in 1986 and 1987? A debt only becomes a bad debt if there is no reasonable chance that it will be repaid. Here the appellant who was in charge of Richcrest claimed the debts as being bad ones, but his actions and words belied this both in his evidence and written argument.

In evidence it was admitted that the loans were still shown on the books of the company. The fact that they were not written off as being bad was indicative of the fact that it was hoped that some day they could be paid off.

In written argument reference was made to "the notes had been accumulating" and such was the case because the appellant continued to advance money to Richcrest.

It is somewhat unfortunate that events turned out as they did and it is clearly seen that the debts did not become bad debts in 1986 and 1987. It is not necessary therefore to deal with the alternative arguments.

It may be useful to refer to a letter written in 1990 by the Department of Justice to the appellant's solicitor wherein it was said:

There is no objection, in principle, to the losses being recognized in 1990 if events are structured in the proper way.

Such was the explanation given by Walsh, J. in the case of Lakeview Gardens Corp. v. M.N.R., [1973] C.T.C. 586, 73 D.T.C. 5437, where he set out at page 591 (D.T.C. 5440):

However, as has been frequently pointed out, it is not what the taxpayer might have done to minimize taxation that determines the issue but the taxpayer must abide by the position which it has taken. This principle was set out in the frequently cited judgment of Lord Simon in Commissioners of Inland Revenue v. Wesleyan and General Assurance Society, 30 T.C. 11, when he said at page 25:

It may be well to repeat two propositions which are well established in the application of the law relating to Income Tax. . . .

Secondly, a transaction which on its true construction, is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax. As the master of the rolls said in the present case: “In dealing with income tax questions it frequently happens that there are two methods at least of achieving a particular financial result. If one of those methods is adopted tax will be not be payable. . . . The net result from the financial point of view is precisely the same in each case, but one method of achieving it attracts tax and the other method does not. . . .”

On the basis of the above these appeals must fail and are hereby dismissed.

Appeal dismissed.