Section 50

In denying the recognition by the taxpayer of a capital loss under s. 50(1)(a), Lyons J stated (at paras. 55, 58, 62, 67):

In Harris v The Queen, 2005 TCC 501, 2005 DTC 1179, Sheridan J….stated "To be eligible to claim either of the amounts as a deduction, Mrs. Harris must have complied with subsection 50(1)… ."

Given the appellant failed to make an election in 2006, or any other year, as required under paragraph 50(1)(a), the appellant cannot succeed as it is imperative to claim that a capital loss is available… .

Since the appellant failed to elect in the return to claim the capital loss, its remedy is to file an application to the Minister under section 220… .

Despite this, no application was made by the appellant to the Minister under the fairness relief provisions. This Court has no jurisdiction with respect to those provisions.

The Canadian-controlled private corporation ("GMG") of which the taxpayer was the principal shareholder made a proposal in May 2011 under the Bankruptcy and Insolvency Act which, when accepted by its creditors, resulted in the interest–bearing unsecured debt owing by GMG to him being extinguished on 30 August 2011. In finding that the resulting capital loss to the taxpayer did not also qualify as a business investment loss ("BIL"), Lamarre J found that a BIL could not be recognized under the s. 50 branch of the definition as the debt was not owing to him at the end of 2011.

See summary under s. 39(1)(c).

The taxpayer made non-interest bearing advances to a wholly-owned incorporated radio station. On 8 August 2008, the corporation made a proposal under the Bankruptcy and Insolvency Act, which was accepted by the creditors, and then approved by the Quebec Superior Court on 9 October 2008. The taxpayer subsequently sold his shares at a gain to a purchaser which was interested in the CRTC radio licences.

The taxpayer's complete loss under the proposal on his advances (although conceded to be a capital loss) was not a business investment loss because his disposition of the advances was not a disposition to which s. 50(1) applied, which required that the advances be owing to him at the end of his taxation year (31 December 2008). After noting that most authorities suggested that under a proposal, the debtor was released of its obligations when the proposal had been accepted by the creditors and approved by the Court, Paris noted that here the taxpayer had renounced his entitlement to receive a distribution with the unsecured creditors (in order to secure approval) and that the corporation had written off the debt in its financial statements for its 31 October 2008 fiscal year:

As the taxpayer's loan no longer existed at 31 December 2008, the provisions of section 50 of the Act could not apply and the appellant had no right to an ABIL (para. 41)

The taxpayers were a married couple employed by a technology research corporation ("cStar"), and one taxpayer was also a shareholder. They lent a significant portion of their salaries back to cStar over several years. In 2005, citing an inability of cStar to meet its financial obligations, they wrote off the loans and claimed business investment losses.

D'Auray J agreed with the Minister that the losses should be denied. The bulk of the evidence showed that, despite various setbacks (e.g. the 2001 the dot-com bubble bust), cStar's financial health was in no worse condition than usual, it continued to attract investors in 2006, many of the setbacks had occurred well before 2005, and the taxpayers continued to lend their salaries.

The taxpayer advanced funds to a start-up company, sold the shares to a friend and, after the sale, made no attempt to collect the advances from the company as she knew the friend was in financial difficulty and, as a friend, she did not want to add to his problems.

In accepting that the taxpayer has sustained an allowable business investment loss, Miller J. stated (at pp. 376-37):

"I conclude that where a creditor could access financial information to assist in assessing the collectibility of a debt but chooses not to, the Court should take into account not only all the factors the creditor in fact considered, but the Court should also consider such financial information in assessing the reasonableness of the creditor's decision."

In finding that the taxpayer was entitled to claim business investment losses in respect of portions of amounts advanced to him by a company run by his wife and also to his an independent company, Sheridan J. stated (at p. 2956) that "the case law is clear that under paragraph 50(1)(a), either all or a portion of the debt may be considered bad" and rejected (at p. 2955) as "an unwarranted expansion of the duty imposed on the taxpayer" a submission of the Crown that the taxpayer ought to have obtained an independent assessment of the amount of the loss and of the company's potential resale value.

At the time in question the corporation was serving customers as usual, employees were working as usual, orders were being taken and filled, accounts receivable being collected, the corporation was developing, manufacturing and selling specialized equipment and was engaged in scientific research in experimental development. Lamarre Proulx J. accepted the taxpayer's submission that in order for a person to be carrying on a business, the person must be engaged in the pursuit of profit, but rejected a submission that because the corporation had as an important goal the repayment of its debts, this meant that it no longer was pursuing profit as a purpose.

In finding that the taxpayer had realized an allowable business investment loss with respect to an advance owing to him, Bowman C.J. noted (at p. 1472) that although the assessor, in concluding that the debt had not become bad, had approached the question carefully and conscientiously, the assessor obviously was substituting his judgment for that of the taxpayer, and the judgment of the taxpayer in the matter was one that a reasonable person would make in the circumstances. Furthermore, the fact that five years later the taxpayer ultimately collected on the debt did not establish that it was not a bad debt in the taxation year in question. "One should, in general, not apply the wisdom of hindsight in determining whether a debt is bad at a particular point in time." (p. 1472).

A loan owing to the taxpayer by a corporation owned by her but which had been depleted of its assets by her estranged husband had become a bad debt at the end of 1998 given that at time the corporation had no assets or customers, was not carrying on business and was not earning income. As there was no evidence to show that collection of the debt was reasonably possibly, the taxpayer was under no obligation to take steps to collect. The Minister unsuccessfully argued that the business investment loss of the taxpayer was reduced by $180,000 in damages for oppression received by her from her husband and his companies.

The taxpayer was able to claim an allowable business investment loss with respect to its investment in a subsidiary that had been incorporated to engage in a speculative business activity that was unsuccessful, notwithstanding that the subsidiary was not wound-up and was amalgamated with the taxpayer more than three years after the year-end at which the allowable business investment loss was claimed. The company was not wound-up or dissolved because of the threat of legal proceedings against the subsidiary, and the double-tax benefit to be derived from a winding-up (i.e., both an allowable business investment loss, and access to the non-capital losses of the subsidiary) made it reasonable to expect that a winding-up would occur notwithstanding that, the proprietor of the taxpayer indicated that, in fact, he never had any intention to have the subsidiary wound-up.

Before going on to find that the taxpayer had realized an ABIL in his 1994 taxation year, as claimed by him, Hamlyn T.C.J. stated (at p. 2530):

"A debt is usually considered to have become a bad debt when the taxpayer has exhausted all legal means of collection. The question of when a debt is to be considered uncollectible is a matter of the taxpayer's own judgment as a prudent, pragmatic, businessman. However, the Court must be satisfied that the taxpayer acted in a pragmatic, business like manner in making the determination of uncollectibility. (See Berreti v. MNR, 86 DTC 1719 at p. 1723.)"

The taxpayers were entitled to write-off 1/2 of the debts owing to them at the end of 1986 by a company ("WFC") given that on October 25, 1986 minutes of a WFC shareholders' and directors' meeting of WFC referred to the intention of the company to cease operations effective December 31, 1986 and that the debt owing to the taxpayers and other family members would not be paid in full and that they had been advised that the most they could expect to receive from WFC would be 50% of the amount outstanding. The balance of the debt was deducted in the following year when it became clear that no money would be forthcoming from WFC.