Cases
Steeves v. The Queen, 77 DTC 5230 (FCA)
At the same time as the taxpayer and his brother purchased the remaining 50% of the common shares of a road-paving company in financial difficulty ("Paving"), they purchased book debts owing to shareholders controlled by the vending shareholders for $70,000, which was approximately 1/9 of their face amount.
Urie J.A. affirmed the finding of the trial judge that the purchase of these book debts had the desired purpose of reaping over $600,000, perhaps tax free, if the Paving venture went well. Accordingly, the book debts were purchased as an adventure in the nature of trade rather than as an investment.
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| Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Loans/receivables | 107 |
Terminal Dock and Warehouse Co. Ltd. v. MNR, 68 DTC 5060, [1968] CTC 78 (Ex Ct), aff'd 68 DTC 5316 (SCC)
One of the activities of the taxpayer, whose main business was that of a dock and wharfage company, was to finance the purchase of shares in its U.S. parent by employees (primarily employees of affiliates) by acquiring such shares for cash and selling the shares to the employee for the same price, payable over 15 years with a below-market rate of interest and secured by a pledge of the shares.
The taxpayer was unsuccessful in its submission that this represented a financing business. A loss realized by the taxpayer when it sold its portfolio of employee receivables to a bank in connection with "cleaning up" its balance sheet for a public offering was a capital loss.
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| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss | advances to employees on capital account | 120 |
Ted Davy Finance Co. Ltd. v. MNR, 64 DTC 5124, [1964] CTC 194 (Ex Ct)
Proceeds received by the taxpayer, which carried on the business of purchasing conditional sales contracts (mostly from a related used car dealer) and lending on the security of chattel mortgages, from the sale of its contracts and mortgages, were capital receipts. Although it retained one mortgage loan and 12 conditional sales contracts because the purchaser did not wish to acquire them, Gibson J. accepted evidence that there was a bona fide intention on its part to go out of the conditional sale and chattel mortgage business and applied the Frankel decision (59 DTC 1161) accordingly.
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| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Inventory | conditional sales contracts not invenory | 75 |
See Also
No. 570 v. MNR, 58 DTC 617 (TAB)
The taxpayer was one of 13 partners in a firm of chartered accountants that sold the practice to another firm, including a sale of the work-in-progress for its estimated billing value. Before finding that the taxpayer's share of the gain on the sale of the work-in-progress was received on income account, Mr. Fordham noted that there was a continuation of the same business with the partners of the old firm transferring to the new firm, and that the taxpayer and his original partners received nothing more than the remuneration they would have received in due course if no sale of the partnership business had been made.
The precedential value of No. 10> v. MNR, 51 DTC 896 and Empire Manufacturing Co. Ltd. v. MNR, 51 DTC 217 was doubted.
Crompton v. Reynolds and Gibson, [1952] 1 All E.R. 888, [1952] UKHL TC_33_288 (HL)
Four successive partnerships (referred to as firms Nos. 1, 2, 3 and 4) carried on business as cotton brokers. Firms Nos. 1 and 2 were deemed to be one firm carrying on the same trade, as were firms Nos. 3 and 4. However, in the succession from firm No. 2 to No. 3, firm No. 3 was deemed for income tax purposes as having commenced a new trade. At the time of that succession (in 1938) a trade receivable of £174,600 which had arisen out of the trading operations of firm No. 1 in 1920 was valued at £124,600 by virtue of a bad debt reserve.
The gain of £50,000 which firms Nos. 3 and 4 realized as a consequence of this trade receivable ultimately being paid in full was a capital gain because the acquisition of the debt was not a transaction within the scope of the cotton broking business carried on by firm No. 3 but, rather, a transaction precedent to the commencement of that business, and the collection of the debt by firms Nos. 3 and 4 was likewise not a transaction in the course of their cotton broking trade.
Administrative Policy
1993 A.P.F.F. Round Table, Q.14 (Windows File No. 3M09520)
"The disposition of trade receivables does not normally result in a capital gain or loss ... . However, a taxpayer's trade receivables are normally capital property when they are disposed of as part of the sale of the taxpayer's business and are not subject to the rules in section 22 of the Act."
3 December 1993 External T.I. 9200995 F - Transfer of Farm Inventory to a Corporation
Since the entitlement of a farmer under a gross revenue insurance program constitutes an account receivable to him that relates to the farming business carried on by him, it is on income account and is not a capital property to him.
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| Tax Topics - General Concepts - Fair Market Value - Other | 66 | |
| Tax Topics - Income Tax Act - Section 56 - Subsection 56(4) | 59 | |
| Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) | 51 |
30 July 1992 T.I. 921871 [elaborating on 913040 below]
Accounts receivable usually will be regarded as capital property except where the taxpayer is a trader in accounts receivable.
3 June 1992 T.I. 913040
A trade debt held by a creditor is considered to be capital property unless the creditor corporation is in the business of lending money. Accordingly, its cost amount, for purposes of section 80, is determined under paragraph (b) of the definition of cost amount.
1 August 1991 Memorandum 911898
Neither the assignment of accounts receivable to a creditor finance company nor the holding of receivables acquired in the ordinary course of business or upon the acquisition of a business as a going concern is indicative of a trading activity. The comments in IT-188R, para. 7 were applicable.
4 April 1991 Internal T.I. 7-902723
Whether the amount realized by the vendor corporation in a receivables securitization is deductible by it turns on whether the arrangement is a purchase and sale, or a collateralized loan.
IT-188R "Sale of Accounts Receivable"
Sale or purchase of trade receivables as part of business on capital account
7. Where a vendor, who...is not a trader in accounts receivable, sells its accounts receivable along with all or substantially all of the other assets of its business...any loss on the sale will be a capital loss to the vendor [absent a s. 22 election]. ... Where a purchaser has acquired the accounts receivable along with all or substantially all of the other assets of a business and ...section 22 does not apply...any gain or loss on realization of the accounts will be a capital gain or loss to the purchaser unless the purchaser is a trader in accounts receivable. ...
Factoring trade receivables and notes receivable on income account
8. Where in the ordinary course of business a taxpayer discounts customer's trade paper such as notes and bills receivable, the amount of the discount is considered to be a deductible business expense, not a capital loss.
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| Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) | 15 | |
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) | 26 |
IT-442R "Bad Debts and Reserves for Doubtful Debts"
Deductibility of bad debt losses on ordinary principles
1. ...[W]here...a debt was of a kind that would have qualified for consideration as a bad debt had it been retained until the end of the taxation year, any loss at the time of its disposition, or later because of non-payment by the debtor, would normally be deductible by the taxpayer as a general business expense. Such loss would be deductible provided the disposition of the debt was made in the ordinary course of the business or as part of trading in accounts receivable. ...
8. ...[A] taxpayer who is in the business of purchasing trade receivables is entitled to claim as a general business expense any loss on the disposition or realization of the receivables. Similarly, a taxpayer who makes advances to an employee to be recouped out of future commissions to be earned by the employee may be entitled to deduct the non-recoverable portion of such advances as a general business expense.
Commentary
The principle that the purchase (or sale) of all or substantially all the assets of a business occurs on capital account except to the extent that the assets in question are stock-in-trade (Southam) suggests that the sale of accounts receivable as part of the sale of a business generally will occur on capital account (see Ted Davy). However, the sale of a trade receivable or an accrued fee amount otherwise than as part of a sale of a business can occur on income account, even if the sale is to a comnpany with which it does not deal at arm's length (see E.C.E), especially if the factoring of trade receivables is part of the business of the taxpayer (Anglemont).
Where accounts receivable or other debts of a corporation are purchased at a substantial discount from their face amount with a view to turning around the fianancial situation of the corporation in order that the debts can be repaid at their face amount, this "turn around" business endeavour will imprint the purchased debts with the character of being held on income account. See Steeves.