Tremblay,
T.C.J.:—This
appeal
was
heard
on
September
1,
1988
at
the
city
of
Montréal,
Québec.
1.
The
Point
at
Issue
The
point
at
issue
is
whether
the
appellant,
an
auctioneer
specializing
in
the
liquidation
of
property
from
bankruptcies,
is
correct
(a)
in
the
computation
of
his
income
with
respect
to
the
1983
taxation
year
to
deduct
business
investment
losses
amounting
to
$44,350
(an
amount
on
the
order
of
$100,000
lent
on
a
note
to
a
company
of
which
he
was
the
owner)
and
(b)
in
the
computation
of
his
income
with
respect
to
the
1984
taxation
year
to
include
the
portion
of
the
debt
which
he
had
recovered,
$46,742,
as
a
capital
gain.
The
respondent
argues
that
no
moneys
were
payable
on
December
31,
1983
and
the
loss,
if
such
there
were,
is
not
deductible
under
subparagraph
40(2)(g)(ii)
of
the
Income
Tax
Act.
2.
The
Burden
of
Proof
2.01
The
burden
of
proof
is
on
the
appellant
to
show
that
the
respondent's
assessments
are
incorrect.
This
burden
of
proof
results
from
several
judicial
decisions,
including
the
judgment
by
the
Supreme
Court
of
Canada
in
Johnston
v.
MNR,
[1948]
S.C.R.
486,
[1948]
C.T.C.
195;
3
D.T.C.
1182.
3.
The
Facts
3.01
Most
of
the
material
facts
relating
to
this
appeal
were
not
disputed.
The
respondent
admitted
most
of
the
facts
alleged
in
the
appellant's
notice
of
appeal,
and
the
appellant
admitted
most
of
the
facts
alleged
by
the
respondent
in
his
reply
to
the
notice
of
appeal.
A
number
of
exhibits
which
also
were
filed
on
consent
confirmed
the
facts
admitted.
3.02
The
facts
admitted
by
the
parties,
and
the
testimony
of
the
appellant
on
examination
in
chief,
may
he
summarized
as
follows:
3.02.1
The
appellant,
a
licensed
auctioneer,
specialized
in
buying
and
selling
the
inventory
assets
of
bankruptcies
or
liquidations.
3.02.2(a)
In
May
1983,
the
appellant
acquired
from
Claude
Lussier,
the
trustee
in
bankruptcy
for
Les
Equipements
Tertran
Ltée,
Les
Coffrages
Industriels
Crémazie
Ltée
and
114245
Canada
Ltée,
various
equipment
used
in
commercial
and
industrial
construction
(cranes,
trailers,
jacks
and
so
on).
On
May
24,
1983,
the
appellant
made
an
offer
of
$170,000,
of
which
$35,000
was
to
be
in
cash
(Exhibit
A-1).
On
May
27,
he
received
a
telex
from
the
trustee
informing
him
that
his
tender
had
been
accepted
(Exhibit
A-2).
A
loan
of
$170,000
was
taken
from
the
Bank
Canadian
National
in
Victoriaville.
3.02.2(b)
The
appellant
testified
that
on
his
first
visit
to
the
auctioneer
Lussier,
this
stock
had
not
interested
him.
It
was
comprised
only
of
construction
equipment
or
machinery,
which
was
not
familiar
to
him.
However,
Lussier,
the
auctioneer,
called
him
back
and
told
him,
among
other
things,
that
one
crane
alone
was
worth
$200,000.
For
that
amount
alone,
he
could
have
the
entire
stock.
Accordingly,
he
then
made
his
offer
of
$170,000.
3.02.3
Despite
all
his
efforts,
and
despite
repeated
contacts
with
construction
contractors,
the
appellant
realized
at
the
end
of
the
summer
of
1983
that
it
would
be
hard
to
find
a
taker
for
a
large
part
of
the
assets
acquired
from
the
trustee,
Lussier.
The
appellant
had
advertised
in
newspapers.
He
had
even
hired
a
firm
that
advertised
to
contractors,
even
in
the
United
States
and
the
Canadian
West.
He
held
an
auction
which
brought
in
$14,000.
3.02.4
The
only
offers
that
the
appellant
received
for
these
assets
came
from
scrap
metal
dealers,
who
wished
to
purchase
these
assets
for
their
metal
weight,
which
at
$15,000
was
only
a
fraction
of
their
actual
value.
3.02.5(a)
At
the
end
of
the
summer
of
1983
Jean
Tremblay
contacted
the
appellant
and
informed
him
that
his
company,
Les
Constructions
J
A
Tremblay
Limitée,
was
quite
familiar
with
the
assets
and
wished
to
purchase
them
for
the
sum
of
$140,000.
3.02.5(b)
This
Jean
Tremblay
is
also
a
shareholder
in
Gestium,
Unifobec,
Cement
Mega,
Loqwipco
Canada
and
Construction
Paloma.
Jean
Tremblay
was
quite
familiar
with
the
items
in
question
because
he
was
himself
the
principal
shareholder
of
the
three
companies
which
had
been
the
owners
of
these
assets
and
which
had
declared
bankruptcy.
The
appellant
was
not
very
enthusiastic
about
this
offer.
However,
after
studying
the
various
options,
he
found
that
he
had
no
choice
but
to
accept.
Either
he
sold
to
the
metal
salvagers
for
$15,000
or
he
transported
the
entire
stock
to
Victoriaville
to
continue
to
try
selling
it.
However,
if
he
could
not
sell
it
in
Montreal,
how
could
he
count
on
being
better
able
to
sell
it
in
Victoriaville,
particularly
since
handling
and
the
cost
of
transporting
all
these
items
was
estimated
at
between
$60,000
and
$70,000?
He
could
only
accept
Mr
Tremblay's
offer
despite
the
financial
difficulties
he
had
just
gone
through.
Moreover,
the
auctioneer,
Lussier,
was
pushing
him
to
leave
the
premises
with
the
entire
stock
by
the
end
of
August,
and
he
had
only
a
few
days
left
before
the
end
of
that
month.
He
had
no
choice.
3.02.6
However,
the
appellant
decided
to
arrange
a
lease-to-purchase
of
the
stock
itself,
through
a
numbered
company.
On
August
30,
1983,
the
appellant
incorporated
a
company,
2159-6093
Québec
Inc.
This
was
a
private
company
limited
to
50
shareholders
and
composed
of
class
"A"
voting
shares
and
class
"B"
non-voting
shares
(Exhibit
A-3).
3.02.7
On
August
30,
1983,
the
appellant
transferred
various
assets
to
2159-6093
Québec
Inc
under
the
rollover
provisions
of
section
85:
—
Cost
of
goods:
$100,000
—
Fair
market
value
of
goods:
$140,000
—
Agreed
amount:
$100,000
(Exhibit
A-4)
Clauses
2
and
3
of
the
contract
(Exhibit
A-4)
read
as
follows:
(Translation)
2.
The
sale
price
is
fixed
at
one
hundred
and
forty
thousand
dollars
($140,000).
3.
This
sale
price
is
payable
as
follows:
3.1
The
first
portion
of
the
sale
price,
equal
to
one
hundred
thousand
dollars
($100,000),
is
payable
by
the
purchaser
providing
to
the
vendor
a
bearer
note
payable
on
demand,
in
the
principal
amount
of
one
hundred
thousand
dollars
($100,000)
without
interest;
3.2
The
second
portion
of
the
sale
price,
equal
to
forty
thousand
dollars
($40,000),
is
payable
by
the
issuance
to
the
vendor
of
four
hundred
fully
paid
up
class
“B”
shares
of
the
purchaser.
3.02.8
The
said
demand
note
(Exhibit
A-5)
reads
as
follows:
(Translation)
2159-6093
QUEBEC
INC
promises
to
pay
on
demand
to
Lucien
Houle
the
sum
of
one
hundred
thousand
dollars
($100,000)
without
interest
either
before
or
after
demand.
On
September
1,
1983,
2159-6093
Québec
Inc,
the
lessor,
and
Les
Construction
J.
A.
Tremblay
Ltée,
the
lessee,
entered
into
a
lease
agreement
(Exhibit
A-6).
Articles
4
and
5
of
that
agreement
read
as
follows:
(Translation)
4.
This
lease
shall
be
for
a
term
of
36
months
commencing
on
the
1st
day
of
September
1983
and
terminating
on
the
31
[sic]
day
of
August
1986.
5.
This
lease
agreement
is
entered
into
in
consideration
of
the
total
sum
of
$140,000
which
the
lessee
undertakes
to
pay
to
the
lessor
at
its
office
as
follows:
(1)
for
the
next
4
months,
equal
consecutive
monthly
payment
of
$10,000
each,
payable
in
advance,
on
the
1st
day
of
each
month;
(2)
for
the
following
32
months,
equal
consecutive
monthly
payments
of
$2,000
principal
plus
an
amount
representing
interest
calculated
at
the
rate
of
12%
per
year,
which
interest
shall
be
calculated
according
to
the
bank
repayment
method
based
on
a
declining
monthly
balance
as
set
out
in
appendix
II.
In
short,
appendix
II
of
this
contract,
Exhibit
A-6,
contained
a
schedule
for
the
36-month
rental
to
be
paid
by
Les
Constructions
J
A
Tremblay
Limitée,
including,
inter
alia,
the
amount
of
$10,000
on
signing
the
contract
and
$10,000
per
month
for
the
months
of
October,
November
and
December.
3.02.9
Article
2
of
the
agreement,
Exhibit
A-6,
provides
that
title
to
all
of
the
property
is
held
and
shall
at
all
times
be
held
by
the
lessor,
and
the
lessee
shall
have
no
property
rights
in
any
of
the
said
property
so
long
as
the
full
price
for
the
property
has
not
been
paid
in
full.
3.02.10
Article
11
of
the
agreement,
Exhibit
A-6,
provides
(Translation)
that
in
the
event
of
default
by
the
lessee
in
paying
any
of
the
rent
provided,
in
whole
or
in
part,
the
full
amount
of
the
rent
provided
herein
shall
become
immediately
due
and
payable
if
the
lessee
fails
to
remedy
such
default
within
15
days
following
the
date
on
which
notice
is
served
on
it
by
the
lessor
to
that
effect.
3.02.11
Article
14
of
the
agreement,
Exhibit
A-6,
states
(Translation)
that
after
the
36th
month
from
the
commencement
date
of
this
agreement,
the
lease
shall
automatically
terminate
and
the
lessee
shall
become
the
owner
of
the
leased
property
for
all
legal
purposes
on
immediate
payment
of
the
sum
of
$36,000
to
the
lessor.
3.01.12
A
first
cheque
in
the
amount
of
$10,000
was
duly
cashed
on
September
1,
1983.
In
October
1983,
2159-6093
Québec
Inc
unsuccessfully
claimed
the
amount
of
$10,000
owing
since
October
1,1983
by
Constructions
J
A
Tremblay
Ltée.
3.02.13
On
November
7,
1983,
clause
5
of
the
agreement,
Exhibit
A-6,
was
amended
by
an
addendum
which
stated
the
following:
(TRANSLATION)
Article
5
of
the
agreement
is
amended
and
the
new
payment
schedule
as
set
out
in
appendix
I
to
this
agreement
is
substituted
for
the
payment
schedule
agreed
in
appendix
2.
Appendix
1
of
the
new
agreement,
Exhibit
A-7,
provides
that
the
October,
November
and
December
payments
would
be
interest
only,
in
the
amounts
of
$1,282,
$1,325
and
$1,282
respectively.
Payments
for
the
first
three
months
of
1984
were
$3,000
principal
plus
interest.
Thereafter,
the
principal
increased
to
$5,000
(one
month),
$6,000
(4
months),
$5,000
(9
months),
$4,000
(1
month),
$3,000
(14
months)
and
$1,000
(1
month),
the
last
payment
being
in
September
1986.
3.02.14
At
the
end
of
December
1983,
$3,248
had
been
paid
out
of
the
total
of
$3,889
interest
that
was
to
be
paid
in
October,
November
and
December.
A
cheque
for
$641
was
returned
on
December
22,
1983
for
insufficient
funds.
3.02.15
The
appellant
testified
that
during
this
period
from
October
1
to
December
31,
1983,
numerous
rent
cheques
sent
by
Les
Constructions
J
A
Tremblay
Limitée
were
returned
after
being
dishonoured.
The
appellant
was
in
frequent
contact
with
and
quite
regularly
went
to
meet
with
Mr
Tremblay
in
search
of
explanations
and
to
try
to
collect
what
was
owing
to
2159-6093
Québec
Inc,
all
in
vain.
He
made
ten
trips
to
Montreal
to
collect
the
rent.
He
had
his
son,
a
lawyer,
send
a
notice
(Exhibit
A-9)
Subsequent
to
this
letter,
the
Gestium
group
stepped
in
to
represent
the
lessee
and
enter
into
the
new
agreement,
Exhibit
A-7.
This
is
pointed
out
in
a
letter
from
Gestium
dated
October
28,
1983
(Exhibit
A-10).
The
appellant
was
even
informed
in
October
1983
that
the
business
of
Les
Constructions
J]
A
Tremblay
Limitée
was
going
quite
badly,
to
the
point
that
management
consultants
had
taken
charge
of
part
of
the
management
of
the
business.
The
company
was
operating
with
unremitted
source
deductions
on
the
order
of
$150,000.
When
he
met
with
Mr.
Tremblay
in
October
1983,
Mr.
Tremblay
told
him
the
following:
(Translation)
I
am
not
in
a
position
to
pay
you,
I
have
just
lost
money.
Wait
until
I
have
money
and
I
will
pay
you.
3.02.16
The
appellant
explained
that
in
his
view
he
had
no
choice
but
to
agree
to
the
terms
of
Exhibit
A-7.
Either
the
numbered
company
repossessed
the
property,
transported
it
to
Victoriaville
at
a
cost
still
between
$60,000
and
$70,000
and
tried
to
sell
it;
or
the
numbered
company
brought
proceedings,
which
would
take
time
and
money,
with
no
guarantee
of
results
because
of
the
lessee's
financial
situation;
or,
finally,
it
agreed
to
the
new
payment
schedule
and
took
the
chance
that
the
situation
might
improve.
From
the
date
the
Exhibit
A-7
agreement
was
signed
until
the
end
of
December,
the
appellant
had
to
make
several
more
trips
to
Montreal.
The
last
cheque,
just
before
Christmas,
was
returned
for
insufficient
funds.
3.02.17
The
NSF
cheques,
Jean
Tremblay's
evasive
attitude
and
his
numerous
unkept
promises,
among
other
reasons,
led
to
the
appellant's
certainty
as
the
director
of
2159-6093
Québec
Inc
that
Les
Constructions
J
A
Tremblay
Limitée
would
not
honour
its
obligations
under
the
terms
of
the
lease-purchase
agreement
of
September
1,
1983.
Accordingly,
the
appellant,
as
the
holder
of
a
note
for
$100,000
issued
upon
the
transfer
of
the
assets
to
2159-6093
Québec
Inc,
had
also
become
certain
that
this
note
would
never
be
repaid
to
him
by
2159-6093
Québec
Inc.
The
lease-purchase
contract
was
the
only
asset
of
2159-6093
Québec
Inc
which
was
likely
to
produce
income,
and
so
the
value
of
the
$100,000
note
held
by
the
appellant
was
directly
related
to
the
value
of
the
lease-purchase
contract.
In
the
belief
that
the
$100,000
note
was
a
bad
debt,
the
appellant
deducted
the
sum
of
$44,350
as
a
business
investment
loss
in
the
computation
of
its
income
for
the
year
1983.
3.02.18
In
a
contract
parallel
to
Exhibit
A-6,
the
appellant,
in
his
personal
capacity,
entered
into
a
lease
agreement
(Exhibit
A-8)
with
Les
Constructions
J
A
Tremblay
Limitée
on
September
1,
1983.
This
agreement
related
to
the
lease
of
9,000
jacks
for
the
sum
of
$35,000.
During
the
first
six
months,
the
lessee
was
required
to
pay
only
interest,
and
then
from
April
1984
to
September
1985
the
rent
was
$1,400
including
principal
and
interest.
3.02.19
During
1984
the
appellant,
who
had
collected
$46,752
on
the
debt
owing
to
the
numbered
company,
had
therefore
included
a
capital
gain
of
$23,376
in
his
income.
3.02.20
According
to
the
appellant,
no
legal
proceedings
were
brought
because
it
was
futile.
The
debtor
itself
had
lost
money
because
of
bankrupt
debtors.
3.03
On
cross-examination,
Lucien
Houle
testified
as
follows:
(a)
On
December
31,
1983,
following
a
new
agreement
entered
into
on
November
7,
1983
(Exhibit
A-7),
there
was
a
balance
owing
of
$641
interest;
he
did
not
know
the
amount
of
the
principal.
(b)
Jean
Tremblay,
the
principal
shareholder
of
Les
Constructions
J
A
Tremblay
Limitée,
was
also
the
principal
shareholder
of
five
other
companies.
(c)
The
lessee
began
to
make
payments
in
March
1984.
(d)
The
1984,
1985,
1986
and
1987
income
tax
returns
of
the
numbered
company,
which
has
a
fiscal
year
starting
on
September
1
and
ending
on
August
31,
were
filed
as
Exhibits
1-2,
1-1,
1-4
and
1-6,
respectively.
(e)
The
appellant's
1983
and
1984
income
tax
returns
were
also
filed
as
Exhibits
1-3
and
I-5,
respectively.
(f)
Exhibit
1-5
indicates
that
on
December
31,
1984
$46,752
had
been
recovered
on
the
debt.
3.04
On
re-examination
in
chief,
the
appellant
testified
that
the
balance
payable
by
Les
Constructions
J
A
Tremblay
Limitée
to
the
numbered
company
on
August
31,
1986
was
$68,878
(Exhibit
1-4)
under
the
contracts,
Exhibits
A-6
and
A-7.
In
September
1988
the
balance
was
still
$60,000.
Moreover,
in
September
1988
the
sum
of
$35,000
was
also
owing
on
the
principal
for
the
jacks
sold
under
the
Exhibit
A-8
contract.
3.05
Jacques
Houle,
the
appellant's
son,
testified
as
follows:
(a)
He
wrote
the
two
contracts,
Exhibits
A-4
and
A-6;
(b)
In
October
1983,
given
the
difficulties
his
father
was
experiencing
in
collecting
his
debt,
he
sent
the
notice
to
Les
Constructions
J
A
Tremblay
Limitée
(Exhibit
A-9)
demanding
payment
of
the
sum
of
$10,000
by
October
25.
(c)
In
reply
to
this
notice,
he
received
from
Groupe
Gestium
Marketing
Limitée
the
letter
dated
October
28,
1983
(Exhibit
A-10)
proposing
a
new
payment
schedule
to
replace
the
schedule
provided
in
the
lease
agreement,
Exhibit
A-6.
(d)
Following
a
long
discussion
with
his
father
about
the
possibilities
of
repossessing
the
assets
and
transporting
them
to
Victoriaville
at
a
cost
of
$60,000
to
$70,000,
it
was
decided
that
the
offer
of
a
new
payment
schedule
would
be
accepted.
(e)
His
father
was
very
worried
by
the
losses
he
foresaw
in
this
business,
which
was
the
topic
of
conversation
during
the
three
or
four
day
1984
New
Year's
holiday.
4.
Law-Cases
at
Law-Analysis
4.01
Law
The
main
provisions
of
the
Income
Tax
Act
involved
in
the
instant
case
are
section
38,
paragraph
39(1)(c),
subparagraph
40(2)(g)(ii)
and
paragraphs
50(1)(a)
and
89(1)(f).
They
read
as
follows:
38.
For
the
purposes
of
this
Act,
(a)
a
taxpayer's
taxable
capital
gain
for
a
taxation
year
from
the
disposition
of
any
property
is
/2
of
his
capital
gain
for
the
year
from
the
disposition
of
that
property;
(b)
a
taxpayer's
allowable
capital
loss
for
a
taxation
year
from
the
disposition
of
any
property
is
'/2
of
his
capital
loss
for
the
year
from
the
disposition
of
that
property;
and
(c)
a
taxpayer's
allowable
business
investment
loss
for
a
taxation
year
from
the
disposition
of
any
property
is
/z
of
his
business
investment
loss
for
the
year
from
the
disposition
of
that
property.
39.
(1)
For
the
purposes
of
this
Act,
(c)
a
taxpayer's
business
investment
loss
for
a
taxation
year
from
the
disposition
of
any
property
is
the
amount,
if
any,
by
which
his
capital
loss
for
the
year
from
a
disposition
after
1977
(i)
to
which
subsection
50(1)
applies,
or
of
any
property
that
is
(iv)
a
debt
owing
to
the
taxpayer
by
a
small
business
corporation
other
than,
where
the
taxpayer
is
a
corporation,
a
debt
owed
to
it
by
a
small
business
corporation
with
which
it
does
not
deal
at
arm's
length
40.
(2)
Notwithstanding
subsection
(1),
(g)
a
taxpayer's
loss,
if
any,
from
the
disposition
of
a
property,
to
the
extent
that
it
is
(ii)
a
loss
from
the
disposition
of
a
debt
or
other
right
to
receive
an
amount,
unless
the
debt
or
right,
as
the
case
may
be,
was
acquired
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
from
a
business
or
property
(other
than
exempt
income)
or
as
consideration
for
the
disposition
of
capital
property
to
a
person
with
whom
the
taxpayer
was
dealing
at
arm's
length,
is
nil;
50.(1)
For
the
purposes
of
this
subdivision,
where
(a)
a
debt
owing
to
a
taxpayer
at
the
end
of
a
taxation
year
(other
than
a
debt
owing
to
him
in
respect
of
the
disposition
of
personal-use
property)
is
established
by
him
to
have
become
a
bad
debt
in
the
year,
or
the
taxpayer
shall
be
deemed
to
have
disposed
of
the
debt
or
the
share,
as
the
case
may
be,
at
the
end
of
the
year
and
to
have
reacquired
it
immediately
thereafter
at
a
cost
equal
to
nil.
89.(1)
In
this
subdivision,
(f)
"private
corporation”
at
any
particular
time
means
a
corporation
that,
at
the
particular
time,
was
resident
in
Canada,
was
not
a
public
corporation,
and
was
not
controlled,
directly
or
indirectly,
in
any
manner
whatever,
by
one
or
more
public
corporations;
and
for
greater
certainty
for
the
purposes
of
determining,
at
any
particular
time,
when
a
corporation
last
became
a
private
corporation,
(i)
a
corporation
that
was
a
private
corporation
at
the
commencement
of
its
1972
taxation
year
and
thereafter
without
interruption
until
the
particular
time
shall
be
deemed
to
have
last
become
a
private
corporation
at
the
end
of
its
1971
taxation
year;
and
(ii)
a
corporation
incorporated
after
1971
that
was
a
private
corporation
at
the
time
of
its
incorporation
and
thereafter
without
interruption
until
the
particular
time
shall
be
deemed
to
have
last
become
a
private
corporation
immediately
before
the
time
of
its
incorporation;
4.02
Cases
at
law
Counsel
for
the
parties
referred
the
Court
to
the
following
cases
at
law:
1.
Anderton
and
Halstead
Limited
v.
Birrell
(H
M
Inspector
of
Taxes),
[1932]
1
K.B.
271;
16
T.C.
200;
2.
Hogan
v.
M.N.R.,15
Tax
A.B.C.
1;
56
D.T.C.
183;
3.
G
I
Norbraten
Architect
Limited
v.
M.N.R.,
[1983]
C.T.C.
2145;
83
D.T.C.
121
(TRB);
4.
Ferriss
v.
M.N.R.,
[1964]
C.T.C.
491;
64
D.T.C.
5304;
5.
MacDonald
Engineering
Projects
Ltd
v.
M.N.R.,
[1987]
2
C.T.C.
2237;
87
D.T.C.
545
(TCC);
6.
Berretti
v.
M.N.R.,
[1986]
2
C.T.C.
2293;
86
D.T.C.
1719
(TCC);
7.
Greensteel
Industries
Ltd
v.
M.N.R.,
[1975]
C.T.C.
2099;
75
D.T.C.
63
(TCC).
4.03
Analysis
4.03.1
The
two
issues
in
this
appeal
resulting
from
the
application
of
the
sections
of
the
Act
quoted
above
are
the
following:
Had
the
$100,000
debt
owing
to
the
appellant
by
the
numbered
company
become
a
bad
debt
at
the
end
of
1983,
as
provided
in
paragraph
50(1)(a),
which
must
be
applied
in
accordance
with
paragraph
39(1)(c)?
If
the
answer
to
the
first
question
is
yes,
a
second
question
arises.
Was
the
debt
acquired
by
the
appellant
for
the
purpose
of
earning
income
as
provided
in
subparagraph
40(2)(g)(ii)
of
the
Act?
4.03.2
With
respect
to
the
question
of
whether
the
debt
owing
to
the
appellant
had
become
a
bad
debt
at
the
end
of
1983,
we
must
first
recall
that
the
only
asset
of
the
numbered
company
was
the
debt
owing
by
Les
Constructions
J
A
Tremblay
Inc.
We
must
ask
what
the
value
of
this
debt
was
on
December
31,
1983.
If
it
was
a
bad
debt
for
the
numbered
company,
the
debt
owing
to
the
appellant
by
the
numbered
company
could
not
be
otherwise.
4.03.2(1)
First,
there
is
no
specific
rule
in
the
Act
setting
out
the
factors
in
determining
when
a
debt
has
become
a
bad
debt.
This
is
a
question
of
fact,
which
must
be
considered
in
each
case.
In
practice,
a
debt
is
a
bad
debt
when
it
becomes
unrecoverable.
In
the
Hogan
case
(para
4.02(2)),
at
page
193
D.T.C.,
Mr.
Fisher,
the
Board
member,
defined
a
bad
debt
as
follows:
For
the
purposes
of
the
Income
Tax
Act,
therefore,
a
bad
debt
may
be
designated
as
the
whole
of
a
portion
of
a
debt
which
the
creditor,
after
having
personally
considered
the
relevant
factors
mentioned
above
in
so
far
as
they
are
applicable
to
each
particular
debt,
honestly
and
reasonably
determines
to
be
uncollectible
at
the
end
of
the
fiscal
year
when
the
determination
is
required
to
be
made,
notwithstanding
that
subsequent
events
may
transpire
under
which
the
debt,
or
any
portion
of
it,
may
in
fact
be
collected.
The
person
making
the
determination
should
be
the
creditor
himself
(or
his
or
its
employee),
who
is
personally
thoroughly
conversant
with
the
facts
and
circumstances
surrounding
not
only
each
particular
debt
but
also,
where
possible,
each
individual
debtor
(although
this
latter
requirement
would
be
unlikely,
for
example,
in
the
case
of
a
mail
order
department
debt
where
reliance
would
most
likely
have
to
be
placed
on
credit
reports
or
other
documentary
information
or
on
the
opinions
of
third
parties.
In
the
Anderton
and
Halstead
Limited
case
(para
4.02(1)),
at
page
209,
Mr.
Justice
Rowlatt
stated
the
following:
What
the
statute
requires,
therefore,
is
an
estimate
to
what
extent
a
debt
is
bad,
and
this
is
for
the
purpose
of
a
profit
and
loss
account.
Such
an
estimate
is
not
a
prophecy
to
be
judged
as
to
its
truth
by
after
events,
but
a
valuation
of
an
asset
de
praesenti
upon
an
uncertain
future
to
be
judged
as
to
its
soundness
as
an
estimate
upon
the
then
facts
and
probabilities.
4.03.2(2)
One
of
the
first
factors
to
be
considered
is
the
nature,
the
origin
of
the
debt.
At
the
time
the
appellant
entered
into
the
transaction
with
Mr.
Tremblay
in
August
1983,
he
was
already
in
a
difficult
situation.
Having
purchased
stock
consisting
of
construction
material,
with
which
he
was
not
familiar,
he
had
to
get
rid
of
it
before
the
end
of
August.
Mr
Tremblay
knew
this
and
set
his
terms.
The
appellant
could
not
refuse
them
(paras
3.02.2,
3.02.3,
3.02.4
and
3.02.5).
The
appellant
undoubtedly
erred
in
purchasing
the
stock,
but
we
cannot
criticize
him
for
this,
even
though
this
error
obliged
him
to
enter
into
a
forced
and
risky
transaction.
4.03.2(3)
The
age
of
the
account
can
sometimes
be
an
important
factor.
On
the
other
hand,
the
circumstances
that
make
an
account
uncollectible
may
arise
at
any
time
during
the
life
of
the
account,
even
if
the
account
is
not
yet
payable.
There
may
be
various
circumstances,
but
the
bankruptcy
of
the
debtor
is
undoubtedly
the
simplest
case.
The
financial
situation
of
the
debtor
may
also
make
it
reasonable
to
believe
that
the
debtor
will
not
be
able
to
pay.
In
the
case
at
bar,
the
appellant
entered
into
a
transaction
with
Jean
Tremblay,
the
principal
shareholder
of
Les
Constructions
J.
A.
Tremblay
Limitée,
the
same
person
who
was
the
principal
shareholder
of
three
companies
which
had
declared
bankruptcy,
the
assets
of
which
the
appellant
had
purchased
from
the
trustee,
Mr
Lussier,
in
May
1983
(para
3.02.2(a)).
Mr
Tremblay
himself
informed
the
appellant
in
October
1983
that
he
did
not
have
the
money
to
meet
the
payment
schedule
(Exhibit
A-6),
and
that
his
business
had
been
bad.
It
must
not
be
forgotten
that
the
economic
recession
was
not
yet
over.
Mr
Tremblay
said
"I
will
pay
you
when
I
can".
A
statement
was
made
to
the
appellant:
Les
Constructions
J
A
Tremblay
Limitée
was
operating
with
$150,000
in
source
deductions;
how
reassuring
for
the
appellant
(para
3.02.15).
The
appellant
was
obliged
to
accept
the
new
payment
schedule
(Exhibit
A-7)
limited
to
interest
(para
3.02.16).
That
again
required
many
trips
to
Montreal
to
collect
the
interest.
The
last
cheque,
dated
December
22,
1983,
came
back
marked
“insufficient
funds".
4.03.2(4)
Nor
can
the
Canadian
economic
crisis,
influenced
by
the
world
crisis,
be
ignored.
We
know
today
that
at
the
end
of
1983
this
crisis
was
abating,
but
who
could
then
have
said
so
with
certainty?
Certainly
not
the
appellant
or
Jean
Tremblay.
4.03.2(5)
I
have
therefore
reached
the
first
conclusion,
that
it
was
reasonable
for
the
appellant
to
believe
on
December
31,
1983
that
his
debt
would
become
uncollectible.
4.03.2(6)
Must
we,
as
was
done
in
the
MacDonald
Engineering
Projects
Ltd
case
(para
4.02(5)),
take
into
account
moneys
collected
by
the
numbered
company
before
the
appellant
filed
his
1983
income
tax
return
(Exhibit
1-3)?
This
return
was
signed
on
April
27,
1984.
The
case
cited
above
concerned
a
doubtful
debt.
The
case
at
bar
concerns
a
bad
debt.
Because
of
the
principle
at
stake
and
the
case
law
on
which
it
is
based,
I
do
not
see
any
difference
between
them.
Accordingly,
the
moneys
collected
before
April
27,
1984
should
not,
in
my
opinion,
be
considered
as
a
bad
debt.
There
was
practically
no
evidence
concerning
the
payments
made
before
April
27,
1984.
The
only
evidence
is,
according
to
the
numbered
company's
return
for
the
year
ending
August
30,
1984
(Exhibit
1-2),
that
at
that
point
the
debt
was
$112,985.
Because
on
December
31
the
principal
of
the
debt
was
$130,000
($140,000
less
the
sum
of
$10,000
paid
on
September
1,
1983)
we
see
that
between
January
1,
1984
and
August
31,
1984
$17,015
was
paid.
Moreover,
it
was
admitted
by
the
parties
that
the
sum
of
$46,752
was
collected
during
the
calendar
year
(para
3.02.19).
Accordingly
an
amount
may
possibly
have
been
paid
before
the
income
tax
return
was
filed.
It
may
be
that
no
money
was
paid
before
the
income
tax
return
was
filed.
It
may
also
be
that
the
full
$17,015
had
been
paid
before
April
27,
1984.
It
will
be
easy
for
the
parties
to
reach
an
agreement.
In
any
event,
the
appellant
had
the
burden
of
proof
and
the
Court
must
find
that
the
sum
of
$17,015
had
been
collected
before
the
appellant's
income
tax
return
was
filed
on
April
27,
1984.
5.
Conclusion
The
appeal
is
allowed
in
part
with
costs
and
the
matter
referred
back
to
the
respondent
for
reconsideration
and
reassessment
in
accordance
with
the
reasons
set
out
above.
Appeal
allowed,
in
part.
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